FTSE 100 dividend shares could offer improving total returns over the long run that boost the size of your retirement nest egg. Certainly, short-term risks, such as trade tensions between the US and China as well as a weak global economic outlook, could weigh on their prospects.
However, with low valuations, a lack of other income-producing opportunities, and recovery prospects for the index, large-cap dividend shares could prove to be UK stock market bargains. And that could help you retire early.
UK stock market bargains
The FTSE 100 appears to currently offer good value for money. It may have rebounded following the market crash earlier in the year, but the index still trades around 17% down on its 2020 starting price. This suggests many of its members offer wide margins of safety, as well as high yields, that could lead to high returns.
Through buying a range of stocks at the present time, you could capitalise on the index’s low price level. Its track record of performance shows it’s always been able to recover from downturns to post fresh record highs. However, the possibilities of that happening in the coming months may be relatively low due to an uncertain economic outlook. But investing over the longer term is likely to produce turnarounds for many companies that currently offer wide margins of safety.
FTSE 100 dividend stocks appeal
With low interest rates likely to remain in place over the medium term, FTSE 100 dividend stocks could become increasingly popular among income-seeking investors. Previously, investors may have relied on income-producing assets such as cash and bonds through which to gain a passive income. However, low inflation and weak GDP growth forecasts mean monetary policy is likely to remain dovish for a prolonged period of time.
This could cause demand for dividend shares to rise. Certainly, there are always risks regarding whether dividend payments will be maintained or grow over the long run. However, the difference in returns between shares and other income-producing assets may convince many investors that the risk/reward opportunity within the FTSE 100 is highly attractive. This could lead to increasing demand for income shares that pushes their prices higher over the coming years.
Being able to retire early through purchasing FTSE 100 dividend stocks may sound somewhat unlikely at the present time, due to a challenging economic outlook. However, buying stocks while risks to their prospects are relatively high has historically been a means of accessing more attractive risk/reward opportunities.
Through building a diverse portfolio of bargain UK dividend stocks, you could improve your retirement prospects. As such, now could be the right time to start the process. Certainly while many FTSE 100 shares appear to offer a potent mix of high yields and low valuations.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.